I received some feedback recently after a speech I gave on, “How To Make Financial Crime Pay”. It prompted me to write the following for the investing public, based on what I learned working over twenty years inside the investment industry.

The feedback referred to the Certified Financial Planning designation as if it were a license or a profession when sadly it is not. Not yet at least. It is a correspondence course that anyone can take, with no minimum requirements. It does not replace, improve, or over-rule the fact that nearly every single person calling themselves a CFP, CIM, or CF “anything” is being paid by sales commissions. An “eat what you kill” incentive plan. It might serve to mislead the public, however into believing otherwise and that unfortunately is the intent of some sellers. To mislead. To sell.

When I worked in the investment industry approximately 100% of persons selling financial products were legally licensed and registered in a category called “salesperson”. However this name was always cleverly hidden from the public using the many other names financial salesmen call themselves. Some call themselves planners, some advisors, some consultants. Zero called themselves what they were licensed as. Zero referred to themselves by how they were paid. The public should be asking government why this is allowed. All licensed salespersons found methods to avoid using the “saleperson” word. In some circles that is called misrepresentation. In my financial industry this is called “standard industry practice”. Call your MP and MLA and tell them if this is no longer acceptable to your financial health.

The fact that many industry people might have taken a course, titled Certified Financial Planning, or any one of a thousand such courses anyone can take, has little to do with their license, their practice or their behavior. I provided industry sales statistics in my speaking presentation that showed how most mutual funds are sold with the highest reward to the salesperson and the greatest penalty to the customer. This is not “advice”, nor is it financial planning. It is not even professional. This is predatory selling under the clever disguise of giving advice. It is also against the law and every code of conduct and industry rule. Again, sadly, this is the standard industry practice so people who should protect end up looking the other way. Having a Certified Financial “anything” course does not change this reality. It just makes misleading the public into parting with their money a bit easier. Many courses are simply used for marketing, to allow a salesman to proclaim a “sort of professional” status while operating totally as a commission product seller.

To mistake the name of a “course” for a “profession” and to begin calling oneself a “certified financial planner” when ones license with the government says something else, and ones compensation comes from commissions, is just one of many sleight of hand misrepresentations that my speech included that permits financial crime to pay so well. Using the same logic, should I be calling myself a Doctor, since I took a first aid course? The logic would be yes if we were talking about the investment industry. It would sell better.

Until members of the investment industry display an actual license on the wall in their office, the public will never know whether they are dealing with a salesperson, or a trusted professional advisor, or the brand new name given to nearly all 130,000 formerly licensed “salespersons” in Canada; “dealing representative”. Yes, the securities commission in your province cleverly and quietly just removed all reference to the word “salesperson” on Sept 29 of this year, and replaced it with “dealing representative”. I will let you think through the possible motivations of doing this, and while you are thinking this through, keep in mind that the salaries of each person at the provincial regulator are paid by fees charged to the industry they regulate, the investment industry.

Other developed countries have learned that one cannot both be a trusted professional advisor and a commission salesperson at the same time. Canada is a bit behind and is struggling to have it both ways as long as it possibly can. We have five major banks here who do over 90% of the investment business in the country and they very much enjoy the Canadian way of having your cake and eating it too.

Further info and background to this can be found at http://www.breachoftrust.ca as well as full video of the Southern Alberta Council speech titled “Making Financial Crime Pay” A How to Guide by a former industry insider.

Signed Larry Elford (formerly a Chartered Financial Planner, Certified Investment Manager, Fellow of the Canadian Securities Institute and Associate Portfolio Manager, now retired)

Dodd's financial reform bill would eliminate the ‘broker-dealer exemption'Legislation would give SEC authority to allow principal tradesBy Sara Hansard November 10, 2009Brokers who provide investment advice would no longer be exempt from registering as investment advisers under draft legislation unveiled today by Senate Banking Committee Chairman Christopher Dodd, D-Conn.The 1,136-page discussion draft of financial reform legislation circulated by Mr. Dodd would eliminate the so-called “broker-dealer exemption” from the Investment Advisers Act of 1940. The exemption spares brokers from registering as advisers if the advice they provide to clients is “solely incidental” to selling products.

Under the draft, the Securities and Exchange Commission would be given rulemaking authority to allow brokers who provide advice to conduct principal trades that otherwise would be restricted under the Investment Advisers Act. Investors would have to be protected against conflicts of interest, and the SEC would have to determine allowing brokers to conduct such “prohibited transactions” is in the public interest.

The so-called “broker-dealer exemption” in the Investment Advisers Act of 1940 has long been contentious for investment advisers. In 2007, the Financial Planning Association won a major lawsuit against the SEC based on the provision. The U.S. Court of Appeals for the District of Columbia Circuit ruled that the SEC had incorrectly applied the exemption by allowing brokers who collect asset-based fees to escape from registering as advisers.

“It would be a dramatic change,” said Mercer Bullard, president and founder of Fund Democracy Inc., a mutual fund shareholder advocacy group. “Virtually every broker-dealer would have to register as an investment adviser.”

Mr. Bullard said that eliminating the broker-dealer exemption would allow the SEC to increase scrutiny of firms that have escaped adviser registration. One such firm, such as Bernard L. Madoff Investment Securities LLC, perpetrated a massive Ponzi scheme over two decades.

“We think this is a sound approach,” said Neil Simon, vice president for government relations of the Investment Advisers Association, which represents federally registered advisory firms. “This would be a way to give brokers relief from provisions of the Advisers Act” that interfere with the business model of brokerage firms, Mr. Simon said.

Conducting principal transactions, in which brokers sell products to clients from their firm's inventory, is a major part of the brokerage business. Restrictions on principal transactions in the Investment Advisers Act have been a major stumbling block for brokers who want to provide investment advice to clients.

Like the proposed Investor Protection Act approved Oct. 28 by the House Financial Services Committee, the Dodd bill would require any financial service professional providing personal advice to act as a fiduciary.

However, the Dodd bill takes a different approach from the House bill. The House bill would require the SEC to write regulations defining the fiduciary standard for advisers. The Senate bill extends the fiduciary duty to broker-dealers by eliminating the broker-dealer exclusion, and otherwise leaves the Investment Advisers Act unchanged.

“It's the best and simplest approach,” said Dan Barry, director of government relations for the Financial Planning Association. “It makes it clear that the standard that applies to advisers and brokers is the same exact standard, the same exact remedies,” he said.

But the Securities Industry and Financial Markets Association continued to call for rewriting the fiduciary standard to harmonize standards for brokers and advisers. SIFMA supports “the creation of a new, federal fiduciary standard for broker-dealers and investment advisers when they provide personalized investment advice,” Kenneth Bentsen, executive vice president, public policy and advocacy, said in a release.

Adviser groups oppose creating a new fiduciary standard, which they fear would be weakened.

Unlike the House bill, Dodd's draft would allow the SEC to keep fees it collects to fund its operations. SEC Chairman Mary Schapiro has called for such a self-funding mechanism.

That would allow the agency to bypass the congressional appropriations process and it would increase the agency's funding considerably. The agency expects to collect $1.5 billion in fees for the fiscal year that began Oct. 1, SEC spokesman John Nester wrote in an e-mail. The Obama administration has proposed an SEC budget of just over $1 billion for the same fiscal year.

Under the proposed legislation, an Office of the Investor Advocate would also be created within the Securities and Exchange Commission.

The Office of the Investor Advocate would report directly to Congress annually on the 20 most serious problems encountered by investors in dealing with the SEC and the Financial Industry Regulatory Authority Inc., the length of time that each item has remained on the list, actions taken by the SEC or SROs to resolve the problems, and/or why actions have not been taken.

The head of the office would be the Investor Advocate. The Investor Advocate would be appointed by and report to the commission, but the officer would have the power to employ independent counsel, research and service staff that the officer would deem necessary to carry out the functions of the office.

“It creates a position with an enormous amount of clout,” said Mr. Bullard.

The Investor Advocate’s Office “would wield a very large club within the commission,” he said.

No such provision is contained in the Investor Protection Act approved Oct. 28 by the House Financial Services Committee.

as one of the solutions that is being applied in other jurisdictions, see a Bill introduced into congress in April of this year.

It has been referred to in the bill as the "CONFLICTED INVESTMENT ADVICE PROHIBITION ACT OF 2009"

I describes how the current environment allows for investment account owners to have access to investment advisors who have self interests or conflicts of interest, and it goes about changing the rules and codes to compensate or protect the public interest from these conflicts of interest.

We could expect something similar in Canada, were it not for the fact that we only have five or six really large financial players, and they seem to be as effectively in control of our legislative process as the legislators are. Canada is the poster child for conflicts of interest and for not bothering to correct same.

this post goes to a bit larger picture than the flogg, overall, but bear with me for one moment while I take you on a flight of fantasy.

Imagine sitting in a helicopter, in the hover, and pulling power without allowing any of the other controls to change.......up, up, up, but not away. Climb vertically several thousand feet (if you have the power) and gain some perspective on the overall landscape. If you have never done this, I urge you to pay $500 bucks to a flight instructor to give you a private spin in a helicopter before you die. You won't have experienced anything quite like it, but I digress. They say perspective is worth 50 IQ points and thus I need this from time to time.

The machine gets a lot harder to control in the hover as you rise from the ground, the reason is that you begin to lose visual references to judge your position by. The trees, the ground, fenceposts etc. All these become less useful at 3000 feet agl, but other things become clearer.

Here is what I intended to say to start with, and it relates to a "repair" of capitalism. There is a "bug" in the system and it should be worked out. And also, it is one public response to Mike Moore's plea for action in the wake of his good film, CAPITALISM, A LOVE STORY. Now if a guy could only contact mike moore?

Humanism. A new form of capitalismThe name is HUMANISM.The game is how to improve Capitalism so that it can function as it should, without resorting to so much financial cannibalism of each other. So much greed, and so much financial abuse.

We have seen Communism. We have seen Socialism. We have seen Capitalism. They could all be defined this way:In the first one, man is allowed to exploit his fellow man. In the other two it is just the opposite.

Humanism, on the other hand, is where human beings and human lives are given a place of importance. A priority if you will. How?Humanism is Capitalism with accountability. With responsibility for ones actions. Not simply the kind we have now were the man with the most lawyers beats up the other man with the least. But real, societal support for fairness, and accountability. Where when one man is beaten or abused by another by capitalistic means, the entire society acts in a manner to correct this. Where predators are not simply allowed to prey on the weakest members of society at will.Milton Freidman, the Nobel winning economist, with his "FREE TO CHOOSE" motto, left only one small item out. That item is the fact that with freedom comes responsibility. As we all tell our 16 year old son when we first give him the keys to the family car, "son, with this freedom, comes responsibility to behave and to act in a manner so as to not hurt anyone. You have a big responsibility and if you do not live up to it, you WILL lose this freedom". We need to put together a world where every one of us is told the same thing; "with economic freedom, comes a responsibility to behave in a manner appropriate". If you do not, you will be held to account.

Greed is good.......but not it if is used to hurt others. It all too often is allowed to.

Accountability means an entire new industry being introduced. An industry to ensure responsible humane behavior. To curtail the financially insane. To hold them to account for the damage done to other humans, or to the planet. It is an attempt to make our economy sustainable, and sustainable for more than just the top 1% of the population.

Many mutual fund fines remain unpaid The Chronicle Herald HalifaxBy CLARE MELLOR Business Reporter Fri. Oct 9 - 4:46 AMSeven of 17 fines levied by the Mutual Fund Dealers Association of Canada during the latest fiscal year were not collected.

The national organization regulates mutual fund dealers and their representatives, who are licensed with provincial securities commissions.

The 17 fines that were imposed by the association between July 1, 2008, and June 30, 2009, amounted to $5.6 million, according to Hugh Corbett, director of litigation for the Toronto-based association.

Of that $5.6 million in fines, "$480,000 was actually paid," Mr. Corbett said in an interview.

One of the seven unpaid fines amounted to $2.6 million. In that case, a mutual fund dealer became insolvent, he said.

On Tuesday, former Halifax mutual fund salesman Bruce Schriver was disciplined by the association for infractions that included redeeming about $116,000 from a client’s account and not repaying it. Part of Mr. Schriver’s penalty included a $200,000 fine, even though a hearing panel acknowledged that the fine might not be collected.

Mr. Schriver’s lawyer, Peter Kidston, argued at the disciplinary hearing against levying a financial penalty as it would be "a paper fine" because Mr. Schriver has no means to pay.

The association does not have the legal authority to collect fines from those who have left the mutual fund industry.

Self-regulatory investment watchdog organizations like the Mutual Fund Dealers Association and the Investment Regulatory Organization of Canada "don’t have any judicial enforcement mechanism in our powers to be able to go to court and collect those fines," Mr. Corbett said.

"When someone remains in the (mutual fund) industry, obviously they have to pay their fine to stay in the industry. Where there is difficulty collecting fines is when people leave the industry," he said.

The self-regulatory organizations have asked the Canadian Securities Administrators to give it authority under law to collect fines.

"As of yet, those powers have not been granted to us," Mr. Corbett said.

If the Nova Scotia Securities Commission issues a penalty or fine against an individual or company for breaking securities laws, it has the ability under law to collect the fine.

Any order of the Nova Scotia Securities Commission can become an order of the Supreme Court, Scott Peacock, the commission’s director of enforcement, explained Wednesday.

Mr. Peacock was not able to provide figures on how often the securities commission has to seek a judgement through the courts against individuals or companies to collect fines or penalties it has issued.

A recent amendment to the Nova Scotia Securities Act will allow the commission to order an individual or company to pay restitution to its clients in certain cases where there have been breaches of securities laws. However, that amendment is yet to be proclaimed.

Ken, I could not agree more with your comments.............."fine the dealer"

This would solve all problems of the firms being able to "look the other way" while a few brokers and salespeople get caught.

Your second comment about restitution money is also perfect. If there were a "fund" or insurance program to fund this, which everyone in the business had to pay money into, in order to belong in the industry........it could create a culture of compliance, which is the opposite of the culture we now have.

This quote applies directly to the investment and investment regulatory business. I believe they have lost the moral right to regulate and the current financial regulatory regime needs to be replaced by those capable of doing an effective job.

It is my understanding that current regulators do not even quite know who they work for, and who they owe a duty of care to. The purport to protect the public, while collecting a salary and future benefits from the industry, and the conflicts of interest are far too great for those currently in this job.

A compensation fund that paid victims back out of every financial service provider pockets just might make a few more of them in opposition to rampant looting. It might make Canada less of a free ride for crooks. I am not sure it is the only solution, but might be part of the solution.

Planners face clean-upFinancial planners are expected to finally dump trailing commissions in an effort to lift their game.

Richard WebbAugust 16, 2009FINANCIAL planners are preparing to bow to public pressure and eliminate the controversial ongoing trailing commissions they receive from many fund managers in return for recommending their investments.

The move is part of far-reaching changes soon to be introduced by leading industry body the Financial Planning Association to raise standards in the industry and move to a more transparent fee-for-service method of payment.

It follows mounting public concern that the trailing commissions represent a fundamental conflict of interest for the industry.

The move will also remove the question of why the commissions continue to be paid to the financial planner every year you remain in the fund regardless of whether you consult that financial planner again.

The transition to a solely fee-for-service regime should also help restore the industry's tarnished image following the collapse of financial planning giant Storm Financial this year, jeopardising $4.6 billion in client investments.

Jo-Anne Bloch, chief executive of the association, said the perceived conflict of interest the commissions represented was so deeply embedded that the industry had no choice but to abandon them.

She said financial planners needed to move to a situation in which the customer clearly paid for all of their financial advice rather than the product provider contributing to the planner's remuneration.

''The days of commissions are probably over,'' she said.

''We have to be transparent in this environment, and it's fair to say that these commissions have not necessarily served financial planners or their clients particularly well.''

She said the industry wanted to remove the perceived conflict of interest and return to promoting the value of ''good quality financial advice''.

The association has 12,000 members managing the financial affairs of more than 5 million Australians with investments valued at $630 billion. It is expected to release its final recommendations to members soon, Ms Bloch said. The recommendations are expected to include removal of all commissions by July 2012.

Under the fee-for-service system, you will pay for financial advice with an upfront fee, or the financial adviser will charge a percentage of your assets under management, or at an hourly rate.

''The difference is that the client negotiates the fee and it comes out of the client's account - it's not from the product provider,'' Ms Bloch said.

Peter Johnston, executive director of the Association of Independently Owned Financial Planners, has been calling for the change for some time.

''It means the adviser can sit down and negotiate a fee with a client,'' he said.

''Once we have negotiated this, we can then begin to decide which product and strategy suits your circumstances without commissions getting in the way.''

He said the removal of the fees would also make it easier to rate the performance of funds. ''It's far better that fund managers compete on a wholesale rate,'' he said.

But Paul Moran, of Paul Moran Financial Planning in Carlton, said there was nothing inherently wrong with commissions as they were clearly declared with all other remuneration received on all statements to the customer. They suit some people and not others, he said.

''It's not how people get paid, the issue is whether the client is getting value for that fee.

''The investment decisions should always be driven by the client - they should never be driven by the adviser getting more revenue.'' Mr Moran believed the trailing commission retainer was more appropriate in certain circumstances than the charging of an hourly fee (likely to be $150 to $300 an hour).

''Say an adviser invests $20,000 into a fund with a trailing commission of 0.4 per cent - that's $80 a year but you can call the adviser at any time. If it's $200,000 that's $800 and you would expect to see the adviser once or twice a year - that's appropriate, but if it's $1 million and $4000, well that's probably excessive.''

Mr Moran said many customers wanted their financial adviser to keep an eye on their investments during the year, and in these cases it was appropriate there was some sort of retainer rather than an hourly rate.

The British regulator’s significant proposals are aimed at putting an end to clients’ lack of confidence in the industry’s integrity

By James LangtonJanuary 2009

Britain’s financial Services Authority has long been on the leading edge of efforts to devise better regulation on behalf of retail investors. Now, the FSA is forging ahead with a plan to overhaul the way retail financial services products are sold, which could sound the death knell for traditional commission structures in that market.

In late November, the FSA published its plans for a new model of retail regulation.· The ambitious plan aims to deal with what the FSA terms “the many persistent problems” it has observed in the retail investment market over the past 20 years, many of which stem from the great imbalance in knowledge and market power that exists between the financial services industry and retail clients.“Insufficient consumer trust and confidence in the products and services supplied by the market lie at the root of what we are seeking to address,” the FSA plan says. “The poor standards of practice that we continue to observe in our supervision of some firms serve only to exacerbate this issue.”

Some of this lack of confidence in the industry’s integrity is the result of bad practices; some of it stems from the industry’s poor image with consumers. The FSA hopes that its new regime addresses both sources of concern by enhancing investor protection and improving customers’ perception of the quality of that protection, thereby encouraging new investors to enter the market.

The FSA project represents an effort to go beyond simply treating the symptoms of fractured investor confidence and aims to tackle the root cause. “We have deliberately taken a different approach,” its plan declares, “to resolving the long-standing issues in this market than we and previous regulators have done.”

The three primary goals of this effort are: reducing the inherent conflicts of interest in industry compensation structures by improving cost transparency; raising professional standards; and drawing clearer distinctions between the types of services on offer and improving clients’ understanding of those differences.

In short, the FSA is planning to draw a clear line between firms that offer independent advice and those that provide sales, such as firms with captive sales forces, or execution-only firms such as discount brokers. Advisors in both categories would have to meet new, higher professional standards.

Firms and advisors in the sales category would have to separate the cost of the product from the cost of their advice and clearly disclose the cost of the advice. Those in the independent advice channel would be required to agree with the client on the cost of advice up front. In addition, product manufacturers will be taken out of the advisor compensation equation as much as possible.

The overriding goal of these measures to reform remuneration practices, the FSA plan says, is “for customers to understand clearly the different services being provided. To recognize the value of advice, separate disclosure is required of the costs of advisory services from product costs.”

Also, the regulator says, firms that purport to provide impartial advice must remove any ability for product manufacturers to influence advisor compensation, if that advice is to be regarded as truly independent. There are two basic ways for advisors to get paid: by the client directly or by a third party such as a product manufacturer. The FSA believes that the latter method is not necessarily a problem. That said, it worries that the process for determining what gets paid can cause conflicts of interest, which can create risks that advisors may not act in their clients’ best interests.

Arrangements in which manufacturers determine what gets paid, and when, create the potential for bias in an advisor’s recommendations, the FSA believes. Its plan suggests that this potential for bias can undermine consumer confidence. And, it notes, it may also encourage advisors to churn their accounts. That’s why the regulator intends to impose new requirements designed to curtail that influence and require distributors to set their own charges for advice.

The FSA plan notes that the FSA would like to go further and completely cut manufacturers out of the compensation chain, but that it may not be able to do this for various legal and tax reasons at this point.

Instead, under the new regime, any compensation provided to an advisor by a product manufacturer must be funded directly by a simultaneous, matching deduction from the client’s product. The FSA is also aiming to eliminate pre-determined payments, such as trailer commissions, as much as possible. The idea is to ensure that clients are bearing the cost of the advice they receive and advisors are setting their own levies, so that manufacturers can’t sway advisors with outsized or unearned commissions.

“Our approach to advisor remuneration will be designed to reduce significantly the potential for providers to influence independent advisors’ remuneration, reducing the potential for bias (and the perception of bias) and improving overall industry sustainability and consumer confidence,” the FSA plan maintains. “We also want to improve consumer awareness that independent advice has a cost and has a corresponding value, to empower more consumers and further boost their confidence in the market.”

Introducing a new regulatory paradigm is never easy. In Canada, recent efforts such as the B.C. Securities Commission’s British Columbia model and the Ontario Securities Commission’s fair-dealing model plugged along for a couple of years. But ultimately, they were either abandoned, as in the case of the B.C. model, or revised beyond recognition, as in the case of the FDM. It eventually became the registration reform project, with far less ambitious goals than originally conceived.

However, Britain’s financial services industry is reacting favourably to the FSA’s plans. Following the announcement of the FSA’s proposed approach, the British Bankers’ Association came out in support of the proposals.

“The banks support the FSA’s approach to reforming financial advice: ensuring that everybody knows what they are paying for and that they get what they are paying for,” said the BBA’s CEO Angela Knight in a statement. “Separating the cost of the product from the cost of advice will bring clarity and certainty to consumers, and the drive toward greater professionalism among advisers will ensure their advice is of a reliable quality.”

The Association of Private Client Investment Managers and Stockbrokers said in a release it welcomes “any moves toward increasing professional standards and transparency for clients.” However, it warns, “the devil is in the details.” The FSA must be careful of unintended consequences.

The FSA concedes that there are risks in changing long-standing compensation practices and driving the industry toward charging for advice: “We need to be mindful that the market for investment advice is by no means perfectly competitive,” its plan says. “Consumers may engage an advisor because they lack the skills, information or confidence to understand financial products and services — and they may exhibit price-taking behaviours as a result.”

One of the primary risks the FSA foresees is firms adopting harmful practices such as discriminatory pricing — charging more to consumers that they perceive to be financially unsophisticated. Another risk is product manufacturers trying to undermine the rules by exerting influence over distributors in new ways. The FSA plans to address these sorts of issues in consultations, as it finalizes just how its proposals will work in practice.

The FSA is planning to phase in this new regime over the next few years. It expects it to be fully implemented by the end of 2012. IE

With the UK recently banning commissions in the financial advice game, and this article from Australia talking about banning trailing commissions on mutual funds, it is time for Canada to rid itself of some of the more self serving, self regulatory bodies and move forward towards best practices:

FINANCIAL planners are preparing to bow to public pressure and eliminate the controversial ongoing trailing commissions they receive from many fund managers in return for recommending their investments.

The move is part of far-reaching changes soon to be introduced by leading industry body the Financial Planning Association to raise standards in the industry and move to a more transparent fee-for-service method of payment.

It follows mounting public concern that the trailing commissions represent a fundamental conflict of interest for the industry.

The move will also remove the question of why the commissions continue to be paid to the financial planner every year you remain in the fund regardless of whether you consult that financial planner again.

The transition to a solely fee-for-service regime should also help restore the industry's tarnished image following the collapse of financial planning giant Storm Financial this year, jeopardising $4.6 billion in client investments.

Jo-Anne Bloch, chief executive of the association, said the perceived conflict of interest the commissions represented was so deeply embedded that the industry had no choice but to abandon them.

She said financial planners needed to move to a situation in which the customer clearly paid for all of their financial advice rather than the product provider contributing to the planner's remuneration.

''The days of commissions are probably over,'' she said.

''We have to be transparent in this environment, and it's fair to say that these commissions have not necessarily served financial planners or their clients particularly well.''

She said the industry wanted to remove the perceived conflict of interest and return to promoting the value of ''good quality financial advice''.

The association has 12,000 members managing the financial affairs of more than 5 million Australians with investments valued at $630 billion. It is expected to release its final recommendations to members soon, Ms Bloch said. The recommendations are expected to include removal of all commissions by July 2012.

Under the fee-for-service system, you will pay for financial advice with an upfront fee, or the financial adviser will charge a percentage of your assets under management, or at an hourly rate.

''The difference is that the client negotiates the fee and it comes out of the client's account - it's not from the product provider,'' Ms Bloch said.

Peter Johnston, executive director of the Association of Independently Owned Financial Planners, has been calling for the change for some time.

''It means the adviser can sit down and negotiate a fee with a client,'' he said.

''Once we have negotiated this, we can then begin to decide which product and strategy suits your circumstances without commissions getting in the way.''

He said the removal of the fees would also make it easier to rate the performance of funds. ''It's far better that fund managers compete on a wholesale rate,'' he said.

But Paul Moran, of Paul Moran Financial Planning in Carlton, said there was nothing inherently wrong with commissions as they were clearly declared with all other remuneration received on all statements to the customer. They suit some people and not others, he said.

''It's not how people get paid, the issue is whether the client is getting value for that fee.

''The investment decisions should always be driven by the client - they should never be driven by the adviser getting more revenue.'' Mr Moran believed the trailing commission retainer was more appropriate in certain circumstances than the charging of an hourly fee (likely to be $150 to $300 an hour).

''Say an adviser invests $20,000 into a fund with a trailing commission of 0.4 per cent - that's $80 a year but you can call the adviser at any time. If it's $200,000 that's $800 and you would expect to see the adviser once or twice a year - that's appropriate, but if it's $1 million and $4000, well that's probably excessive.''

Mr Moran said many customers wanted their financial adviser to keep an eye on their investments during the year, and in these cases it was appropriate there was some sort of retainer rather than an hourly rate.

White House pushes new investor protectionsObama administration seeks new powers for the SEC to regulate compensation for investment advisors and other measures.

July 10, 2009: 3:47 PM ETWASHINGTON (Reuters) -- The Obama administration on Friday proposed legislation to strengthen the Securities and Exchange Commission's investor protection authority, including the power to ban certain forms of compensation for brokers and investment advisers.

The SEC would get authority under the bill to establish consistent fiduciary standards for broker dealers and investment advisers and could ban bonuses or other forms of compensation for financial intermediaries that encourage them to steer investors into products that are not in the investors' best interests.

The bill, one of several financial regulatory reform bills sent by the U.S. Treasury to Congress this summer, also aims to improve disclosures to investors, close gaps in standards and pay whistleblowers for information that can be used in enforcement actions.

The bill comes just days after the administration proposed a new agency that would get sweeping powers to protect consumers on many financial products that fall outside of the SEC's jurisdiction.

The bill would give the SEC authority to require delivery of disclosures and prospectuses before investors buy into mutual funds, not after as is typically the case currently. The SEC could require a concise summary prospectuses and a simple disclosure form showing fund costs.

The SEC also would gain authority to establish a fund to pay whistleblowers for information leading to enforcement actions that result in significant financial awards. The money would come from penalties paid that are not distributed to investors.

"This authority will encourage insiders and others with strong evidence of securities law violations to bring that evidence to the SEC and improve its ability to enforce the securities laws," The Treasury said in a summary sheet on the legislation.

A new SEC investor advisory committee, which examines new products, trading strategies, fee structures and disclosures, would be made permanent under the legislation.

FSA details the enhanced standards people can expect from all investment advisers

Jon Pain

This is a call to action for the industryFSA/PN/082/200925 June 2009

The Financial Services Authority (FSA) has today published proposals to build people’s trust and confidence in the retail investment market.

The FSA has issued a consultation paper on its Retail Distribution Review (RDR), which sets out detailed proposals to implement the wide-ranging reforms it outlined in November last year. The changes, which will take effect from the end of 2012, will improve outcomes for savers and investors by enhancing the quality of advice they receive, and prepare both consumers and the industry for the future.

In particular, the FSA is consulting on rules to ensure that:

· Independent advice is truly independent and reflects investors’ needs;· People can clearly identify and understand the service they are being offered;· Commission-bias is removed from the system – and recommendations made by advisers are not influenced by product providers;· Investors know up-front how much advice is going to cost and how they will pay for it; and· All investment advisers will be qualified to a new, higher level, regarded as equivalent to the first year of a degree.The FSA is calling on all investment advisers to consider how they will adapt to these reforms. Although challenging, the RDR presents a significant opportunity for firms and individuals in the retail investment market to modernise practices, raise standards and improve the way they treat their customers.

Jon Pain, FSA managing director of retail markets, said:

"The RDR is about regaining consumer trust and confidence in the retail investment market, building a more sustainable sector and making it easier for people to find their way around and get the help they need – this is more important now than ever before.

"We have today set out the specific changes we propose to make to implement our far-reaching package of measures. This is a call to action for the industry - all investment advisers need to consider how they will respond and implement these wide-ranging and challenging improvements by the 2012 deadline.

"Throughout this process there has been close involvement of the industry and consumer groups, and we look forward to stakeholders’ continued engagement and to receiving their views on the detailed proposals we are setting out today."

The FSA is inviting stakeholders to comment on its detailed rules for implementing the RDR – the closing date for responses is 30 October 2009.

Notes for editors

1. The FSA’s consultation paper on the RDR (CP09/18), was published today.2. The FSA's RDR feedback statement was published in November 2008. The discussion paper on the RDR was published in June 2007, and the interim report was published in April 2008.3. To help investment advisers understand the detailed proposals it is setting out today, the FSA has published a series of factsheets on its small firms website.4. The FSA has today also published the research which has informed its consultation paper: ‘Retail Distribution Review proposals: Impact on market structure and competition’ by Oxera; ‘Describing advice services and adviser charging’ by IFF Research; and ‘Firm behaviour and incremental compliance costs’ by Deloitte.5. The FSA will publish a separate consultation paper in Q4 2009 on the creation of an independent Professional Standards Board, which will be responsible for maintaining and enforcing the new professionalism standards in the RDR. It will also consult in Q4 2009 on the application of the RDR proposals to the corporate pensions market.6. The FSA will be publishing a policy statement in Q4 2009 on prudential rules for Personal Investment Firms (PIFs), following its consultation paper of November 2008. 7. The Financial Services Skills Council will be consulting in August 2009 on the content of the higher level qualifications for investment advisers.8. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.9. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.

Last week's regulatory changes by Britain's Financial Services Authority (FSA) received little coverage here in Canada. However, these are changes that should grab the attention of Canadian advisors, suppliers and regulators alike.The biggest change made was regarding how advisors get paid. The FSA has effectively banned upfront sales commissions from being attached to any financial instruments, including insurance policies. Instead advisors will have to provide clients with a fully disclosed, upfront choice of a one-time billable fee or an ongoing fee for service.The FSA claims that the move will prevent unsuitable products from being pushed by unscrupulous advisors who care more about making money than helping people.Read: British regulator bans commissionsWhat I found most surprising is the reaction from the U.K. advisor community. It claims that this will not be a big change. Now, I know very little about the U.K. marketplace but clearly it is miles away from the Canadian one. This sort of regulatory change would be earth shaking in Canada where DSC fees are the norm for mutual funds, and insurance products — with the exception of seg funds — are only available via an upfront commission.As a fee for service advisor, I have to applaud this legislation and can only hope that it serves as a model for future regulatory changes in this country. I know this opinion will likely make me unpopular amongst many of my peers, but I think this sort of change would create a better industry for just about everyone involved.Let's consider the parties involved.ClientsThe question of how much they are paying for advisory services would no longer be dependent upon which advisor they use and their level of disclosure. This type of transparency would lead to a greater emphasis on continuing service to justify the fees being charged, which could in turn lead to greater levels of client maintenance and, I hope, trust in the industry.Existing advisorsThe elimination of upfront commissions would help this industry transition from a sales industry to a client relationship based industry. All too often I deal with people who never hear from their advisor after they purchase a product, and the client is too often tied to DSC schedules or old policies that the advisor has no monetary incentive to maintain.I am a believer that everything in this industry should be portable from one advisor to another, and that the only advisor who should receive any ongoing compensation should be the one who is actually advising the client. However this would require the elimination of DSC sales, the levelling of insurance commissions and the end of lifetime vesting on insurance policies. The tradeoff, of course, is that all products in an advisor's book would be paying them recurring fees and increasing the sale value of their book.New advisorsThis is the one group that would no doubt suffer from such legislation. The elimination of upfront commissions will make the early years far less profitable for advisors. However, they could structure their practice in such a way that they focus themselves on bringing in business that is looking for upfront, onetime fee-for-service advice.Mutual fund companiesI was once told by a wholesaler that somewhere in the neighborhood of two thirds of all calls to a mutual fund company's back office are DSC related. Accurate or not, it is clear that the issuance of these commissions, as well as the maintenance of funds within a DSC structure, are of significant cost to mutual fund companies. Elimination of this structure would result in decreased costs and potentially decreased MERs to clients.Insurance companiesThese product issuers would see the biggest change if similar legislation was ever put into place in Canada. The large upfront commissions that are common to these products would disappear and potentially be replaced with an ongoing service trailer that would have to be significantly larger than the tiny sums that are currently paid out. However other negative aspects of the industry would disappear as well, including agents who offer no after-sale support to their clients, the financial incentive to twist policies and the need to finance enormous upfront commissions.I think that the key principle the FSA took hold of here, in addition to the clients right to full disclosure, is that this industry should be one of advice and relationships and not one of sales. As such, the financial remuneration should be in line with that. No longer will unscrupulous advisors push products on clients because it pays well. Nor will advisors be able to hide what they are charging from the client.As of 2012, every client in the U.K. will have the choice of either paying an advisor upfront for their work and walking away from the relationship or paying them on an ongoing basis to work for them.Isn't that a right that Canadian investors deserve?Jason M. Pereira, MBA FCSI FMA, is a financial consultant with Woodgate Financial Partners (IPC Investment Corporation) in Toronto.(07/02/09)Filed by Jason M. Pereira, editor@advisor.ca

FSA details the enhanced standards people can expect from all investment advisers

Jon Pain

This is a call to action for the industryFSA/PN/082/200925 June 2009

The Financial Services Authority (FSA) has today published proposals to build people’s trust and confidence in the retail investment market.

The FSA has issued a consultation paper on its Retail Distribution Review (RDR), which sets out detailed proposals to implement the wide-ranging reforms it outlined in November last year. The changes, which will take effect from the end of 2012, will improve outcomes for savers and investors by enhancing the quality of advice they receive, and prepare both consumers and the industry for the future.

In particular, the FSA is consulting on rules to ensure that:

· Independent advice is truly independent and reflects investors’ needs;· People can clearly identify and understand the service they are being offered;· Commission-bias is removed from the system – and recommendations made by advisers are not influenced by product providers;· Investors know up-front how much advice is going to cost and how they will pay for it; and· All investment advisers will be qualified to a new, higher level, regarded as equivalent to the first year of a degree.The FSA is calling on all investment advisers to consider how they will adapt to these reforms. Although challenging, the RDR presents a significant opportunity for firms and individuals in the retail investment market to modernise practices, raise standards and improve the way they treat their customers.

Jon Pain, FSA managing director of retail markets, said:

"The RDR is about regaining consumer trust and confidence in the retail investment market, building a more sustainable sector and making it easier for people to find their way around and get the help they need – this is more important now than ever before.

"We have today set out the specific changes we propose to make to implement our far-reaching package of measures. This is a call to action for the industry - all investment advisers need to consider how they will respond and implement these wide-ranging and challenging improvements by the 2012 deadline.

"Throughout this process there has been close involvement of the industry and consumer groups, and we look forward to stakeholders’ continued engagement and to receiving their views on the detailed proposals we are setting out today."

The FSA is inviting stakeholders to comment on its detailed rules for implementing the RDR – the closing date for responses is 30 October 2009.

Notes for editors1. The FSA’s consultation paper on the RDR (CP09/18), was published today.2. The FSA's RDR feedback statement was published in November 2008. The discussion paper on the RDR was published in June 2007, and the interim report was published in April 2008.3. To help investment advisers understand the detailed proposals it is setting out today, the FSA has published a series of factsheets on its small firms website.4. The FSA has today also published the research which has informed its consultation paper: ‘Retail Distribution Review proposals: Impact on market structure and competition’ by Oxera; ‘Describing advice services and adviser charging’ by IFF Research; and ‘Firm behaviour and incremental compliance costs’ by Deloitte.5. The FSA will publish a separate consultation paper in Q4 2009 on the creation of an independent Professional Standards Board, which will be responsible for maintaining and enforcing the new professionalism standards in the RDR. It will also consult in Q4 2009 on the application of the RDR proposals to the corporate pensions market.6. The FSA will be publishing a policy statement in Q4 2009 on prudential rules for Personal Investment Firms (PIFs), following its consultation paper of November 2008. 7. The Financial Services Skills Council will be consulting in August 2009 on the content of the higher level qualifications for investment advisers.8. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.9. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.

We need financial cops - and speed limits

June 28, 2009Mary Schapiro, chairman of the Securities and Exchange Commission, is correct: Fiduciary standards for all who give investment advice won't be sufficient to deter fraud.High standards are never enough. Consider that every state and municipality has traffic laws and speed limits that are posted and widely known. Yet the same jurisdictions also have police forces to enforce the laws and a jail to house those who violate them.In most fields of endeavor, there are a few people who violate or try to game the rules and regulations for their own advantage. The investment advisory field is no exception, as the Madoff scandal and other recent cases of fraud have reminded us.In fact, as reported in InvestmentNews last week, about a third of the 26 actions that the SEC has brought against Ponzi-type schemes since January involved investment advisory firms subject to fiduciary standards.Simply declaring that all who provide investment advice must adhere to a fiduciary standard and act in the best interests of the client won't make them do so.That is why President Obama's regulatory reform outline, put forward by Treasury Secretary Timothy Geithner almost two weeks ago, is merely a first step.If Congress includes that fiduciary standard in any reform bill it passes — which by no means is a sure thing, given the intensive lobbying that will no doubt accompany the drafting of the law — it must also give the body assigned to regulate investment advisers the additional manpower and resources to enforce the standard.That is true whether the authority and responsibility are assigned to the SEC, which now oversees investment advisory firms with at least $25 million in assets, the Financial Industry Regulatory Authority Inc. of New York and Washington, which oversees the brokerage industry, or the Washington-based Certified Financial Planner Board of Standards Inc., which is angling for the oversight role.The SEC has the staff and structure, but needs more of both to properly oversee and enforce fiduciary standards at thousands of small independent advisory firms.Likewise, Finra has some of the staff and some of the tools it would need for the task, but it would need more of both, and the staff would have to be trained in a new mindset.The CFP Board would need to build the necessary staff and systems almost from scratch, which wouldn't necessarily be a bad thing because the new staff wouldn't have anything to unlearn.Firms whose employees or affiliates give investment advice, whether financial planning firms, investment advisers or brokers, will have to adjust to a new regime. This new world no doubt will include different, probably more intrusive, and possibly more frequent audits — the cost of which will be borne by all financial advice givers.Whichever institution receives a congressional mandate to enforce a fiduciary standard, it will have to conduct new and different audits to catch rule breakers in the act.Just as traffic police in many jurisdictions use radar traps and sobriety checkpoints to catch speeders and drunk drivers, the responsible financial agency will have to be proactive in seeking signs of fraud. It can't wait for bad times to reveal the crooks who prospered in good times.Doing so inflicts too much financial harm on too many investors and damages the integrity of the investment advisory profession and the capital markets.Just as the sight of a police car parked on a highway shoulder deters speeders, so too will the presence of proactive overseers deter financial fraud.

The price of gasoline is skyrocketing again and, as I filled the tank of my family car yesterday, I startedfeeling the familiar pain of watching the digits spin at Warp Five and the corresponding toll it was takingon my wallet. It got me to thinking of the possibility of gasoline hitting a new record of, say, $4.60 agallon. We could easily be paying $3,286 annually for fuel.

Paying that much for gas would be déjà vu all over againfrom last summer, when Americans found that they neededto start changing their travel plans to accommodate the priceincrease. Those lazy summer days, since gas was tooexpensive to go anywhere, had us dreaming of a morefuel-efficient car, like maybe one that ran on water. Just grabthe hose from the front yard and fill &#8217;er up. Howgreat would that be?

While there isn’t such an engine that I know of, there issomething even better. If you have a $200,000 portfoliowith typical total fees of two percent, you could actually savemore than owning a water-fueled car by lowering costs to0.25 percent.

Don’t believe it? Well, let’s take a look at how much you could save with each:

Eliminating the painful stops at the gas pump would save us $3,286 annually if gas reached $4.60 agallon, and $1,857 annually at today’s price of about $2.60 a gallon. Yet by cutting our fees on a $200,000portfolio, investors would save a full $3,500 annually.

Pure economics dictates that the more money we lose, the worse off we are. Not exactly quantum physics.Therefore, economic theory would predict that we’d change our investing habits before we’d change ourdriving habits. But we don’t.

And the reason we don’t is that our actions are not typically ruled by the law of economics — or even logic,for that matter. Any investor with two brain cells to rub together knows intellectually that they’re likelypaying high costs for their portfolios, but prefers to ignore them rather than take the effort to figure outjust how high they are. On the other hand, unless you pump gas with a blindfold, it’s pretty muchimpossible to ignore how much it costs to fill up the gas tank.

My Advice

I wish the disclosure in the investment industry was astransparent as the auto industry. Wouldn’t this disclosure onour 401(k) plan be nice?

Unfortunately, the most that can be done is to try to hackthrough the dense thicket of data to find this information. Ifyou have a planner, ask them in writing to estimate the totalfees you are paying. This would include fees:

n Based on a percentage of assets.n Based on commissions.

Within the funds that are part of the portfolio.

Hidden within a portfolio or fund such as commissions, spreads between the bid and the ask pricewhen funds turnover stocks, and other fees known as market impact costs.

If you manage the portfolio yourself, go to Morningstar and look up the expense ratio, which will give youthe disclosed part of your fund’s fees. Then look up the fund’s annual turnover on Morningstar’s site,divide by 100 and add the two together. For example a fund with a 1.25% expense ratio and a 75%turnover would have an estimated 2.0% annual total fee (1.25% + 75%/100).

Of course the easiest way to rein in your fees is to make sure you have a few ultra low cost broad indexfunds such as a total US, international, and bond index fund such as those of a simple second graderportfolio. It won’t completely take the sting out of stopping at the pumps, but at least it may sting a littleless to know you are saving more on investments than you are spending on gasoline.

Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisoryfirm that advises clients with portfolios ranging from $10,000 to $50 million. He is mocked on asemi-regular basis by some financial professionals for his hourly fee model and its obvious inability tomake him rich.

Roth is also the author of How A Second Grader Beats Wall Street. He teaches behavioral finance at theUniversity of Denver and is an adjunct faculty member at Colorado College.

Allan Roth

Allan Roth has a lot of credentials (CFP, CPA, MBA) and business experience (McKinsey consulting andofficers of mega-billion dollar companies). But he insists that said credentials and business experience donot interfere with his ability to keep investing simple.

Roth has worked with many a lawyer over the years, so he feels compelled to note that his columns arenot meant as specific investment advice, especially since any such advice would need to take into accountsuch things as each reader’s willingness and need to take risk, which can vary significantly. His columnswill specifically avoid such foolishness as predicting the next “hot stock” or what the stock market will donext month. Roth’s goal is never to be confused with Jim Cramer.